Coal-fired power plants provide close to 80% of China’s electricity

In a series of posts leading up to the launch of the World Economic Forum’s Global Energy Architecture Performance Index Report 2013 on 11 December 2012, Professor Lin Boqiang, Director of the China Center for Energy Economics Research at Xiamen University, studies the case of China, which will account for the largest share of the growth in global energy use up to 2035.

By Lin Boqiang | 10 December 2012

The World Economic Forum’s Global Energy Architecture Performance Index Report 2013 states that energy architecture should support the three objectives of the energy triangle: promoting economic growth and development while ensuring both a secure and environmentally sustainable energy supply. Fossil fuel subsidies are having an adverse effect on these objectives. This is particularly relevant to developing countries like China.

China is in the development stage of industrialization and urbanization. It is expected that domestic energy demand will continue to grow rapidly with increased rates of consumption. The IEA predicts China will account for the largest share of the growth in global energy use up to 2035, with its demand rising 60% in this timeframe.

China is subject to many governmental energy price controls or subsidies. Reforming these subsidies is an important way of meeting both China’s growth objectives and those of the energy triangle.

On the one hand, China’s economic growth requires sufficient and inexpensive energy. Coal satisfies both these requirements, and coal-fired power plants provide close to 80% of China’s electricity today at generally lower prices than other fuel sources. But China also has the largest coal subsidies globally and spends over US$ 2 billion a year to this end. The energy subsidies used to maintain this low cost also encourage more and less efficient fossil fuel use, and result in increasing challenges from CO2 emissions. The difficulty in raising electricity prices through removal of subsidies in China also indicates how sensitive energy cost is as a social issue.

In the early 1990s, the share of the private sector in the power generation mix was as high as 14%. But the government electricity tariff control has resulted in extensive losses to power generation companies. This and other institutional issues have reduced the share of private companies to less than 5% at present. Frankly, encouragement of private investment in the energy sector without complementary policy reforms around energy pricing will have little effect.

Recent reforms indicate the Chinese government understands the negative impact of energy subsidies. Newly revised electricity tariffs encourage reduced electricity consumption by energy-intensive industries and retail electricity prices have been raised to reflect higher coal prices on the global market. In July of this year, the government also began a reform of natural gas tariffs. Increasingly, China’s links to global energy markets mean electricity prices being more closely linked to the raw cost of coal and its consumption.

Further energy sector reforms in China will require a new approach and new ideas. In whatever ways the reforms are designed, they will need to take two constraints into consideration. One is to recognize the fact that it could take a long time for the government to allow energy prices to be determined by the market. The other is that the reforms will not affect energy supply, as China is still in a developmental stage that requires meeting substantial increase in energy demand.

Sometimes, the case can be made for developing counties to adopt energy subsidies. However, even if some subsidies are reasonable and encourage social equity, poor design can limit the subsidy’s impact.

It is clear that energy pricing reforms are necessary for a proper balancing of the energy triangle in China. If for various reasons the Chinese government continues to control energy prices, better designs of energy subsidies are required, including better targeting of beneficiaries to improve energy efficiency and provide universal access, particularly in a situation where most energy companies are state owned.